Taxation of foreign investment funds

If you are an American citizen or live in the United States and like to invest abroad, be aware that investment funds may not be so advantageous.

Unlike direct investments in fixed income or even the purchase of shares in commercial companies such as Petrobras, Vale or others, foreign investment funds are taxed differently from other investments. In investment funds, the investor acquires shares that will be used by the fund to invest in other companies or investments in order to obtain passive income when receiving interest or dividends. In this way, foreign funds are mostly taxed as ordinary income and not as a capital gain as we are used to with investments in the USA.

In addition, the IRS requires US residents to declare their investment funds on Form 8621 if the amount invested exceeds $25,000 if single or $50,000 if married filing jointly with their spouse. If you are required to file this return, talk to your accountant about which of the three IRS sections best applies to your case, as often the accountant, unaware of the full legislation on the subject of foreign investment funds, may apply the general rule, Section 1291, which could result in you paying the maximum amount of tax possible under the progressive table in a complex calculation. Under this rule, taxpayers can pay 37% in income tax on dividends and changes in their funds if they are not well advised and the correct choice is made by their accountant.

So, if you don't have the financial statements of your foreign investment fund, you will pay more taxes than if you invested in an American investment fund, so be aware when you invest in this type of asset outside the USA, and if you still choose to invest, talk to us so that we can advise you on how to minimize the payment of taxes on these investment or real estate funds, exploring whether Section 1293 or Section 1296 applies to you.

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